Last week's post on the WTO's prudential measures defense (PMD) sparked some discussion over at the IELP blog. (Wow, three acronyms in an opening sentence. Awesome!) It's a pretty wonkish issue, but/and I thought I'd follow up with a few additional observations.

On last week's post, I noted that there's four interpretations of the PMD: 1) it's totally self-cancelling: no prudential measures are allowed. 2) it disciplines nothing: any prudential measure is allowed. 3) that the PMD is an "exception" analagous to GATS Article XIV. 4) that the PMD is self-cancelling in the sense that the second sentence makes clear that GATS Article XVI on market access is a floor of treatment. Countries with relevant commitments at the WTO can't go below that that floor for prudential reasons, but they are given some additional flexibility vis a vis other GATS commitments.

While the debate over IELP focused on how these interpretations are different, it's worth noting what they have in common: a measure would have to be deemed "prudential" (and affect trade in financial services) to be covered. Presumably, there's a wide range of potential policies that would not be deemed prudential. (A set of recent papers from the IMF (see here and here) suggests typologies and interrelationships between measures that are about capital flow management or currency, or prudential or non-prudential. Some of the distinctions are very finely drawn, and I'm not sure at the end of the day that the distinctions have that much coherence. Not to mention that they wouldn't be binding on a WTO panel.) Casually speaking, I see "prudential" policies about keeping banks from hurting themselves (including in ways that have systemic residual effects), whereas "non-prudential" (but very important!) policies are about keeping banks from hurting the rest of us.

That's what the interpretations have in common. In essence, the PMD's first sentence represents a hurdle that policymakers have to meet: a policy has to be "prudential" for it to be covered by the PMD. (Arguably, policies that cap bank size or ban financial services or tax rapid capital outflows are about keeping banks from hurting us, not about keeping banks from hurting themselves. Thus, they may not be prudential.)

What sets Intepretation 4 apart is that it gives weight to the PMD's second sentence, and in particular its implications for GATS Article XVI that come from the applicable "exception."

Say a policy is non-prudential, like banning Internet gambling. In a WTO challenge of that ban, the first part of the dispute settlement hearing would be dedicated to figuring whether a country violated its GATS Article XVI commitments. (This article sets a ban on bans, even if they're non-discriminatory.)

If the panel decided that the country had indeed violated their GATS commitments, then the respondent country would likely invoke Article XIV as a defense. That article reads:

Article XIV: General Exceptions

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures:

(a) necessary to protect public morals or to maintain public order;(5)

(b) necessary to protect human, animal or plant life or health;

(c) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement including those relating to:

(i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on services contracts;

(ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts;

(iii) safety;

(d) inconsistent with Article XVII, provided that the difference in treatment is aimed at ensuring the equitable or effective(6) imposition or collection of direct taxes in respect of services or service suppliers of other Members;

(e) inconsistent with Article II, provided that the difference in treatment is the result of an agreement on the avoidance of double taxation or provisions on the avoidance of double taxation in any other international agreement or arrangement by which the Member is bound.

As the opening paragraph ("chapeau") makes clear, the respondent country could argue that the measure that violated their GATS commitments (a ban on Internet gambling) was also a policy "necessary to protect public morals" and was also "not applied" in a protectionist manner or a "disguised restriction on trade". Assuming these (steep) hurdles could be met, the WTO challenge to the non-prudential Internet gambling ban would survive (even though the record would show that GATS Article XVI was violated).

Contrast this with a ban on a risky financial service under the PMD. Assume that this was deemed an Article XVI violation. Assume also that the measure met the threshold requirement of being deemed prudential (i.e. the hurdle posed by the PMD's first sentence). A respondent country would then have to meet the hurdle posed by the second sentence: "Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement."

How can this hurdle be cleared? Article XVI is not a list of principles that should be followed, it is a list of policies to be avoided. The means by which a country accomplishes its policy is the same means by which it avoids its GATS commitments. But under the Article XIV analysis, that can be allowed, provided its not arbitrary, unjustifiable, applied in a protectionist way, or a "disguised restriction on trade."

But under the PMD analysis, the measure would have to be a " a means of avoiding the Member’s commitments or obligations under the Agreement" for sake of establishing the violation of XVI, while at the same time not be " a means of avoiding the Member’s commitments or obligations under the Agreement" for sake of the 2nd sentence PMD analysis. This is not logically possible. The commitment the country undertook was to avoid bans - now it has bans.

To restate: in non-prudential Internet gambling bans passing through XVI and then XIV analysis, a measure that survives scrutiny is simultaneously an XVI violation, a measure necessary to protect morals, and not applied in a protectionist way or a disguised trade restriction. It is conceivable that a policy could be all these things at once.

In prudentially-motivated financial service bans passing through XVI and then PMD analysis, the same measure would have to be simultaneously an XVI violation, prudential, and not "used as a means" of violating XVI.

The former is logically possible; the latter is not.

This seems to be just another way of saying (indirectly, through a logical string) that market access violations can never be prudential.

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